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ILPA’s Diversity In Action Framework: A Brief Guide for Private Equity

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In the evolving landscape of private equity, stakeholder-calls for transparency and accountability have never been louder. As institutional investors, or limited partners (LPs), increasingly demand comprehensive reporting on environmental, social, and governance (ESG) factors, general partners (GPs) are under pressure to meet these expectations while staying ahead of industry trends. One area of focus is diversity, equity, and inclusion (DEI), a critical component of the broader ESG mandate that is gaining momentum within private markets.

The Institutional Limited Partners Association (ILPA), a leader in setting standards for the private equity industry, has introduced a Diversity in Action (DIA) framework that provides a clear pathway for GPs to address DEI, alongside its established ESG guidance. This framework helps GPs align with LP expectations while promoting a more inclusive and sustainable future. In this article, we explore how ILPA’s Diversity in Action initiative, coupled with best practices in DEI data collection and reporting, can drive meaningful change and enhance value for private equity (PE) firms.

ILPA: A Brief Overview

Established in 2002, ILPA serves as a key trade association for institutional investors/LPs in the PE industry. Headquartered in Washington, DC, the association includes over 500 member organizations from around the world, with the majority based in the U.S., and the rest spread across Canada, Europe, and other regions. Collectively, these members—including pension funds, endowments, family offices, foundations, and insurance companies—represent over $2 trillion in assets under management. ILPA’s retention rate of approximately 97% highlights its role as a central entity in supporting and advocating for its members.

With its core mission to enhance governance and transparency within private equity, ILPA provides a range of resources and frameworks aimed at strengthening investor oversight, promoting best practices, and improving industry transparency. These tools are designed to support GPs and LPs in collecting, analyzing, and sharing relevant financial and ESG  data, furthering transparency across the private equity sector.

 

The ILPA Due Diligence Questionnaire & ESG Assessment Framework

ILPA’s most downloaded document, its due diligence questionnaire, or DDQ, standardizes common and pertinent due diligence considerations in order to improve the quality of disclosure to LPs and make the reporting process more efficient for GPs. Typically, LPs supplement the ILPA DDQ with ILPA’s ESG assessment framework in order to benchmark GP responses to due diligence efforts, inform goal-setting conversations with GPs and measure ESG integration progress over time. Recently, this framework was updated to reflect the evolution of the ESG metrics and disclosure landscape, including specific references to the ISSB, ESG Data Convergence Initiative (EDCI), and the Private Markets Decarbonization Roadmap.

Relevant Material ESG Indicators

The ILPA DDQ also contains a small ESG section that helps GPs and LPs ensure that ESG considerations are systematically incorporated into investment processes and reporting practices. The relevant DDQ questions pertaining to ESG are summarized below:

  • Policy – does the firm have an ESG investment policy? Is that policy aligned with any international standards or frameworks? How is it monitored and implemented?
  • Fundraising – what are the firm’s ESG commitments when fundraising?
  • Pre-investment – how does the firm determine material ESG risks or opportunities in its portfolio investments?
  • Post-investment – how does the firm contribute to its portfolio companies’ efforts on ESG risk mitigation and value creation?
  • Reporting and disclosure – how does the firm disclose data and provide evidence for its claims?
  • Climate change – how does the firm measure its portfolio companies’ carbon emissions? What are its climate-related commitments and targets? (Include a TCFD report if it reports in line with this framework.)

The ILPA Diversity in Action (DIA) Framework: A Stepping Stone in DEI Reporting

In addition to the ESG section in the DDQ and the supplementary ESG framework, ILPA has introduced the Diversity in Action (DIA) initiative to encourage diversity, equity, and inclusion (DEI) within the private equity sector. This framework outlines foundational practices that LPs and GPs can adopt to promote DEI across all levels of their operations. The framework consists of two parts – four essential criteria and a set of nine optional criteria that span a broader range of possible actions, addressing talent management, investment management and industry engagement. All of the actions prioritized within the DIA framework are drawn from ILPA’s D&I Roadmap, which houses all of the best practices and resources for GPs and LPs to consider at each stage of the development and implementation of their own DEI programs.

The DIA Framework’s Foundational Required Activities – All 4 of the Following

Participating organizations agree that their DEI actions include a combination of the foundational activities indicated below:

  • Having a DEI statement or strategy in place that is communicated publicly, and/or a DEI policy communicated to employees and investment partners that addresses recruitment and retention. The former also includes addressing harassment, either within the DEI policy itself or within a separately articulated policy or statement
  • Tracking internal hiring and promotion statistics by gender and race/ethnicity
  • Putting in place organizational goals that result in demonstrable practices to make recruitment and retention more inclusive
  • Requests LPs for or provides GPs with DEI demographic data via the ILPA Diversity Metrics Template for any new LP commitments or new GP fundraises

Added in 2023, the DEI Monitoring Questionnaire, modeled on ILPA’s DDQ,, is meant to guide the efforts of investors looking to foster more regular touch points with managers to better understand their DEI trajectory over time. 

ILPA DIA: Data Collection & DEI Reporting Best Practices

What the Market Has Shown Us:

  • The Rise of Data Collection: DEI data collection has hit an all-time high, with more LPs requesting demographic data and GPs increasing the data they are collecting at the firm and portfolio company level. According to a McKinsey report, The State of Diversity in Global Private Markets 2023, firms are now reporting DEI metrics with greater frequency than years past, with 52% reporting on management, investment team, and portfolio company boards. LP demand is a primary driver of these trends. With a growing number of allocators pressing managers for this information, GPs are finding it increasingly important to disclose. 
  • The Importance of Standardization: The demand for standardization in data collection and reporting is also increasing, with firms looking for ways to streamline the process of DEI data collection. Resources like the ILPA DDQ and Diversity Metrics Template exist to alleviate the burden on firms as they respond to a record number of requests from investors for demographic data. Other industry initiatives, like the ESG Data Convergence Initiative (EDCI), attempt to standardize how ESG and DEI data is collected at the portfolio company level. In fact, many  of our clients have used a hybrid framework to comply with LP requests by supplementing  EDCI with enhanced diversity metrics from the ILPA DIA. Read our Client Case Study to learn more about how we helped a PE firm improve its DEI metrics & impact.
  • Senior-Level Oversight & Accountability for DEI: LPs have come to expect that GPs are not only able to clearly communicate their DEI goals as a part of diligence and monitoring conversations, but can also discuss how senior leaders at their firms are accountable for these goals and driving associated outcomes. Three-fourths of DIA signatories report having processes in place that include senior-level oversight for DE&I outcomes. 
  • Action-Oriented Goal Setting: Any signatories to the DIA tend to prioritize action-oriented goals over metrics-based targets. This is particularly true in smaller organizations where metrics are heavily influenced by the gain or loss of only a few employees. Increasingly, GP signatories discuss viewing goal setting as a collective effort, drawing from their engagement externally with asset owners and internally with employee working groups, as opposed to more traditional top-down goal setting processes. In practice, signatories employ a variety of approaches to goal setting. Some of the most popular goals  center on:
    • Diversifying recruitment pipelines by investing in on-campus activities and  emphasizing the importance of representation when leveraging search firms 
    • Improving employee engagement, leveraging employee surveys to understand opportunities and monitoring progress and internal committees to drive inclusion 
    • Improving internal processes associated with collecting (where permissible) DEI data and tracking improvement over time 
    • Developing and promoting DEI best practices at portfolio companies, both at the board level (i.e., improving representation on portfolio company boards) and at the firm level 
    • Establishing resource networks at the firm level that bring leadership across companies together to discuss shared challenges and helpful resources
  • LP signatories are quick to acknowledge that the industry has a long way to go. Several LP signatories have noted that requests for DEI data are not being used in a punitive way and instead being used to set a baseline with the hope that conversations today can shine a light on areas where progress can be made over time.

Automating DEI Data Collection and DEI Reports – DEI Reporters

Steadfast LP demand for transparent ESG and DEI practices is being heard, as evidenced not only by the growing number of sustainability jobs but by the significant raising of their salaries as well.

However, conceiving and implementing an ESG roadmap begins with data, something this new class of professionals will have to contend with. The world is still at a point where differing sustainability frameworks and ESG rating systems are slowly coalescing, helped along by regulation, into something more concrete. In such an environment, GPs can stay ahead of the curve, and save themselves much hassle and headache, by automating their data collection and using cloud-based systems to  analyze and report it.

This point is further substantiated by the discussions held in the the third DIA roundtable in August 2024, where signatories explored the current state of DEI metrics and reporting, including emerging best practices for data collection in the private markets industry. The roundtable revealed that, while firms can take a variety of approaches to collecting and aggregating ESG and DEI data,  firms that lack the resources to build robust internal data collection platforms are frequently leveraging service providers and consultants to aid in the process. 

ESGTree: An ESG and DEI Data Management & Reporting Solution for Private Markets

ESGTree’s ESG and DEI reporting data management platform is designed to address the unique needs of the private markets with a simple, clear, and customized solution to help you easily collect, report, and analyze ESG data. ESGTree provides:

  • A clear starting point for GPs to confidently choose what to measure and track
  • A seamless data collection process with in-platform guidance and support for PortCos
  • Insightful reporting and analytics to track and manage ESG and DEI data across the portfolio
  • Automations for multiple ESG and diversity frameworks like the IFRS S1 and S2, SFDR, PCAF, California SB54, BDC DEI, and ILPA DIAEngineering support to ensure that overlaps in metrics are added only once

In fact, our Industry Report on GP Sentiments around LP Data Requests revealed that tech-enabled service providers like ESGTree provide immense value to GPs by delivering flexible solutions that can:

  • Standardize the taxonomy of ESG and DEI
  • Provide independent ESG assessments and benchmarks
  • Offer GPs flexibility in adhering to different standards that are frequently changing

Every single GP that we interviewed for this Report admitted that if they had a centralized platform to house all DDQs, it would help them give LPs  better-quality answers, drive sounder ESG policies, and boost overall LP portfolio performance. Opportunely, our proprietary software not only supports GPs through DDQ automation, but our in-built collaboration tools allow for easy access to synthesized data across departments, driving the necessary organizational shifts to harness the power of ESG.

ESGTree provides advanced ESG data management solutions using the power of the cloud. Our automated platform is specifically geared to help private equity (PE) and venture capital (VC) firms manage their ESG data collection, analysis and reporting needs. Additional features such as our carbon calculator, benchmarking technology, and other trends and analysis features make ESGTree one of the most advanced SaaS solutions to ESG reporting for investors.

Click here to learn more about ESGTree’s ESG Data Management & Reporting Software for Financial Institutions

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